Problem 1 Four Friends Forever (FFF), opened several years ago and reports the f

ID: 2532432 • Letter: P

Question

Problem 1 Four Friends Forever (FFF), opened several years ago and reports the following net §1231 gains and losses since it began business.

Year

Net §1231 Gains/(Losses)

Year 1

($11,000)

Year 2

8,000

Year 3

(15,000)

Year 4

(22,000)

Year 5

20,000

Year 6

(27,000)

Year 7 (current year)

107,000

Character of the year 7 $107,000 gain (Basically Professor want to know what the character (short, long, 1245. 1250, 1231, etc) of the gain in year 7 is)

PROBLEM 2

Tracy started his sole proprietorship business two years ago and has never sold a §1231 asset. Tracy owned each of the assets for the entire 2 years he has been in business. In the current year, he sold the following business assets:

Asset

Original Cost

Accumulated

Depreciation

Gain/Loss

Desks

$8,000

$2,000

($2,000)

Truck

12,000

6,000

(6,000)

Equipment

18,000

12,000

13,500

Building

150,000

10,000

25,000

Assuming Tracy’s marginal ordinary income tax rate is 30 percent, what is the character of Tracy’s gains and/or losses for the current year? What effect do the various gains or losses have on Tracy’s tax liability?

Year

Net §1231 Gains/(Losses)

Year 1

($11,000)

Year 2

8,000

Year 3

(15,000)

Year 4

(22,000)

Year 5

20,000

Year 6

(27,000)

Year 7 (current year)

107,000

Explanation / Answer

Ans

Following assumptions will be made

The $ 47,000 will be treated as ordinary income and $ 60,000 will be treated as §1231 gain

s.no

description

amount

explanation

Current gain (year 7) §1231

$ 107,000

year 7 gain given

non recaputred losses §1231

$47,000

total from year 1 to year 6

ordinary income

$ 47,000

lesser of S.no 1 or 2

§1231 gain

$ 60,000

current gain - ordinary income